Stop fooling us investors around with unrealistic IPTs

Friday, 29 September 2017

Execution practices developed to cope with the crisis are still being used 10 years on. It’s time for a change, says a leading German investor in this opinion piece, arguing that the predictability of tightening in bookbuilding undermines the supposed rationale for current practices.

Once upon a time – during the financial crisis – issuers, lead managers and investors agreed to implement a kind of spread whisper or spread guidance to see if a bond had a chance of being placed at a certain level in the primary market.

However, this period is far behind us, because the ECB decided to take away all issuers’ and lead managers’ fears of a new issue failing by embarking upon heavy buying of covered bonds on the primary and secondary markets.

In spite of this new paradisiacal environment for issuers, investors are still faced with crisis-like bookbuilding procedures. Issuers and lead managers are to this day opening books somewhat coyly, with generous spread guidance.

“But we need to do this as we don’t want to risk a new deal failing!”

Come off it! We are in a squeezed market with sufficient investors who need to invest, even without the central banks.

So please, stop fooling around investors with spread guidance that is far away from the final new issue level. Yes, this procedure is even worse in other asset classes, but is that really any kind of justification?

What justifies keeping clearly unrealistic spread guidance for hours when a bond is already well oversubscribed after 30 minutes?

In such a case the spread should instead be adjusted quickly to a final range. It is bad form to keep this unrealistic spread for two or three hours and then go out with the final spread range 20 or 30 minutes before the books close. Why do well oversubscribed books show for 85%-95% of the time a spread that is obviously too high? Why only inform investors so late in bookbuilding about the real spread range?

And the information investors receive later on is not even the final spread but still a range – where in around 99% of cases the final level is at the tight end.

All investors should for now wait until a fixed spread or at least a fixed spread range has been released before placing an order, as working with order limits has proven to be of no earthly use.

The current bookbuilding process has to be changed.

Investors should be equipped with a realistic spread range from the beginning of bookbuilding to evaluate if a deal makes sense from a relative value perspective or not. Only 20 to 30 minutes at the end of the bookbuilding process is not sufficient – especially if a much higher level was shown for hours before the spread is finally adjusted.

When opening books issuers and their lead managers should already be able to identify at what levels the bonds should be placed on the market.

The crisis is over! There are enough buyers in the market, even at these squeezed levels.

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